Estate Planning for the Rest of Us
Whoever won that huge $997.6 million cash value Powerball jackpot last November needs some serious estate planning advice.
Ditto for the winner of the $724.6 million cash value Mega Millions jackpot in January.
Sadly, you did not win either. Nor did you inherit gazillions from your rich Uncle Fred, despite kissing up to him for all those years. Rats! Even so, you probably still need an estate plan.
We will explain why.
Don’t Fixate on the Big Federal Estate Tax Exemption
You are probably among the vast majority who are not currently exposed to the federal estate tax, thanks to todayʼs ultra-generous $12.92 million exemption for singles—or effectively $25.84 million for married couples.
While being unexposed is good, the federal estate tax is not the end of the story.
If you have minor children and some assets (maybe just a house, a car or two, and some nice furnishings), you probably need an estate plan regardless of your lack of exposure to the federal estate tax.
Horror Stories: Epic Celebrity Estate-Planning Fails
Even some famous rich folks inexplicably pass away without having taken steps to express their post-demise wishes. Strange but true!
According to reports, Aretha Franklin (estimated net worth $80 million) died without a will, even though she was in poor health and had a special-needs son.
Prince (estimated net worth $200 million) also died without a will.
Ditto for author Stieg Larsson (who wrote The Girl with the Dragon Tattoo), Tupac Shakur, Amy Winehouse, and Sonny Bono. To give them the beneﬁt of doubt, these famous individuals probably meant to create an estate plan someday but never got around to it. You know, tomorrow is another day—until it isnʼt.
Why You Probably Need a Will and a Living Trust
If you die intestate (without a will), the laws of your state determine the fate of your minor children and your assets. Yikes! You need a written will to make your wishes known. You could probably beneﬁt from having a living trust too.
The main purposes of a will are to name a guardian for your minor children (if any), name an executor for your estate, and specify which beneﬁciaries (including charities) should get which assets.
The guardianʼs job is to take care of your kids until they reach adulthood (age 18 or 21 in most states).
The executorʼs job is to pay your estateʼs bills, pay any taxes due, and deliver whatʼs left to your intended heirs and charitable beneﬁciaries.
For wills, good do-it-yourself software is readily available online.
The Living Trust
If you have signiﬁcant assets, you should probably also set up a living trust to avoid probate. Probate is a sometimes-painful court-supervised legal process intended to make sure a deceased personʼs assets are properly distributed.
But going through probate typically means red tape, legal fees, and your ﬁnancial affairs becoming public information. Avoid these things when possible! Thatʼs where the living trust comes in.
How It Works
Establish the living trust, and transfer legal ownership of assets for which you wish to avoid probate—such as your main home, your vacation property, your cars, your antique furniture, and your valuable baseball card collection—to the trust.
In the trust document, you name a trustee to be in charge of the trustʼs assets after you die.
The trust document also speciﬁes which beneﬁciaries will get which assets from the trust.
You can function as the trustee, or you can designate your attorney, CPA, adult child, faithful friend, or ﬁnancial institution. Whatever works for you!
Because a living trust is revocable, you can change its terms at any time, or even unwind it completely, as long as youʼre alive and legally competent. Thatʼs why itʼs called a living trust.
Living trusts are also commonly called “family trusts,” “grantor trusts,” and “revocable trusts.” These are all different names for the same thing.
For federal income tax purposes, the existence of the living trust is ignored while youʼre alive. As far as the IRS is concerned, you still personally own the assets that are now in the trust. So, you continue to report on your Form 1040 any income generated by trust assets and any deductions related to those assets, such as mortgage interest on your home.
For state law purposes, the living trust is not ignored. Done properly, it avoids probate. And thatʼs the goal.
When you die, the assets in the living trust are included in your estate for federal estate tax purposes. But assets that go to your surviving spouse are not included in your estate, assuming your spouse is a U.S. citizen—thanks to the so-called unlimited marital deduction privilege.
As we said at the beginning of this article, you probably donʼt have to worry about any federal estate tax hit with todayʼs huge exemption.
But the exemption is scheduled to go down drastically in 2026 unless Congress extends the current deal. If that doesnʼt happen, revisit your exposure to the federal estate tax.
Advice: Hire an attorney to draft a living trust document. It might cost a few thousand bucks, but that will be money well spent.
Reality Check: Wills and Living Trusts Are Not Cure-Alls
You can clearly see the beneﬁts of wills and living trusts. But mind the details, or you wonʼt get the expected advantages.
Married: If youʼre married, you and your spouse should have separate, but coordinated, wills and/or living trusts. Thatʼs because you never know for sure who will die ﬁrst.
Name the Beneﬁciaries: Your will and/or living trust should be consistent with your beneﬁciary designations and the manner in which your assets are legally owned.
For example, when you ﬁll out forms to designate beneﬁciaries for your life insurance policies, retirement accounts, and brokerage ﬁrm accounts, the named beneﬁciaries will automatically cash in upon your death without going through probate. The same is true for bank accounts if you name payable-on-death beneﬁciaries.
It makes no difference if your will or living trust document speciﬁes to the contrary. So, keep your beneﬁciary designations current to make sure the money will go where you intend.
Co-Ownership: When you co-own real estate jointly with right of survivorship, the other co-owner(s) will automatically inherit your share upon your death. It makes no difference if your will or living trust document says otherwise.
Transfer the Assets: If you set up a living trust so it can perform its probate-avoidance magic, you must transfer to that trust legal ownership of assets for which you wish to avoid probate. Many people set up a living trust and then fail to follow through by actually transferring ownership. If so, the probate-avoidance advantage is lost.
Estate and Death Taxes: In and of themselves, wills and living trusts do nothing to avoid or minimize the federal estate tax or state death taxes.
If you have enough wealth to be exposed to these taxes, additional planning is required in order to reduce or eliminate that exposure.
Note that some states have death tax exemptions that are far below the ultra-generous $12.92 million federal estate tax exemption. So, you could be exposed to state death taxes even though youʼre blissfully exempt from the federal estate tax. In that circumstance, you should seek advice from a good estate tax planning pro.
Remember: Most Estate Plans (Probably Including Yours) Are Moving Targets
Things change. You may acquire new assets, win the next lottery drawing, lose relatives to death, disown relatives, take them back, and gain children or grandchildren. Any of these events and more could require changes to your estate plan.
In addition, federal and state estate and death tax rules have proven to be unpredictable.
For these reasons, review your estate plan at least annually, and update as needed.
- Estate planning is essential for everyone, not just the ultra-rich. Even if you’re not exposed to the federal estate tax, you still need to plan for the distribution of your assets and the guardianship of your minor children.
- Having a will ensures your wishes are respected and legally enforced after your death, including the guardianship of your children and the distribution of your assets.
- A living trust can help your beneficiaries avoid probate, which can be a costly and time-consuming process. It also keeps your financial affairs private and can be amended as your circumstances change.
- Keep your beneficiary designations up-to-date, as they take precedence over wills and living trusts when your assets are distributed.
- Wills and living trusts alone do not minimize the federal estate tax or state death taxes. If you are exposed to these taxes, consult an estate tax planning professional.
- Estate plans should be reviewed and updated regularly to accommodate life changes and fluctuations in estate and death tax rules.
Estate planning isn’t only for the wealthy. It applies to you too. No matter what your financial situation, estate planning is crucial to ensure that your loved ones are taken care of after you pass away.
In this article, I break down the basics of estate planning and show you how to create a plan that fits your unique circumstances. Whether you’re a young adult just starting out or a retiree with a lifetime of assets, “Estate Planning for the Rest of Us” has got you covered.
At Morris + D’Angelo, we are passionate about empowering our customers to make the most of their financial assets through smart tax optimization strategies. If you have questions or concerns about Estate Planning to ensure that your loved ones are taken care of, our expert team is here to help.
Don’t let complex tax laws hold you back – contact us at Morris + D’Angelo to learn how we can support your financial success! This is our Expertise!
Parts of this article are published with permission from Bradford Tax Institute, © 2021 Daniel Morris, Morris + D’Angelo
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